Biostar Pharmaceuticals, Inc. was incorporated in the State of Maryland on March 27, 2007. Through the steps described immediately below, we became the indirect holding company for Shaanxi Aoxing Pharmaceutical Co., Ltd. ("Aoxing Pharmaceutical"), a medical and pharmaceutical developer, manufacturer and marketer in the People’s Republic of China (“PRC), on November 1, 2007.
On June 15, 2007, we formed Shaanxi Biostar BioTech Ltd (“Shaanxi Biostar”) in the PRC as our wholly-owned subsidiary. Because Shaanxi BioTech was 100% wholly owned by Biostar, a U.S. company, it is a Wholly Foreign-Owned Entity (“WFOE”) under PRC laws.
On November 1, 2007 a series of agreements were executed between Shaanxi Biostar and Aoxing Pharmaceutical Co., Ltd (“Aoxing Pharmaceutical”) in order to give Biostar ultimate control of Aoxing Pharmaceutical through its ownership of Shaanxi Biostar and be entitled to consolidate the profits and losses of Aoxing Pharmaceutical under U.S. Generally Accepted Accounting Principles (“GAAP”):
Shaanxi Biostar entered into a Management Entrustment Agreement with Aoxing Pharmaceutical and the shareholders of Aoxing Pharmaceutical (the "Management Entrustment Agreement"), in which Aoxing Pharmaceutical and its shareholders agreed to transfer control, or entrust, the operations and management of its business to Shaanxi Biostar.
Under the Management Entrustment Agreement, Shaanxi Biostar manages the operations and assets of Aoxing Pharmaceutical, controls all of the cash flow of Aoxing Pharmaceutical through a bank account controlled by Shaanxi Biostar, is entitled to all of the net profits of Aoxing Pharmaceutical as a management fee, and is obligated to pay all payables and loan payments of Aoxing Pharmaceutical. In addition, under the terms of the Management Entrustment Agreement, Shaanxi Biostar has been granted certain rights which include, in part, the right to appoint and terminate members of Aoxing Pharmaceutical’s Board of Directors, hire management and administrative personnel and control decisions relating to entering and performing customer contracts and other instruments.
The Management Entrustment Agreement will remain in effect until Shaanxi Biostar exercises its option to acquire all of the assets or equity of Aoxing Pharmaceutical under the terms of the Exclusive Option Agreement as more fully described below. We anticipate that Aoxing Pharmaceutical will continue to be the contracting party under its customer contracts, bank loans and certain other instruments unless Shaanxi Biostar exercises its option. The Management Entrustment Agreement will not terminate unless the business of Aoxing Pharmaceutical is terminated or Shaanxi Biostar completes the acquisition of Aoxing Pharmaceutical. Global Law Office, our PRC counsel, has advised us that in their opinion the Management Entrustment Agreement is legal and enforceable under PRC law.
In exchange for causing Aoxing Pharmaceutical to enter into the Management Entrustment Agreement, we issued an aggregate of 19,832,311 shares our common stock to the shareholders of Aoxing Pharmaceutical, which was allocated based on their respective pro rata ownership of Aoxing Pharmaceutical. The shares of our common stock that were issued for the benefit of Ronghua Wang, Yan Wang, Rongfa Wang, Xuezhu Cao, Rangmei Wang, Xiaoru An, Rong Bai and Yuxing Wang were placed in separate BVI trust accounts with the Equity Trust (BVI) Limited named as their respective trustee to be held for the benefit of each of the respective shareholders (each a “Settlor”). Each trust is irrevocable.
In order to give the Biostar further control over Aoxing Pharmaceutical, the Aoxing Pharmaceutical shareholders and Shaanxi Biostar, entered into a shareholders' Voting Proxy Agreement (the "Voting Proxy Agreement") whereby the Aoxing Pharmaceutical shareholders irrevocably and exclusively appointed the members of Shaanxi Biostar's board of directors, as their proxies to vote on all matters that require Aoxing Pharmaceutical shareholder approval, including, without limitation, the right to appoint members of the board of directors of Aoxing Pharmaceutical. The Voting Proxy Agreement further provides that Shaanxi Biostar will appoint all members of the board of directors of Biostar as its board of directors. As the board of directors of Biostar changes, Shaanxi Biostar must remove and appoint new members of the board to Aoxing Pharmaceutical. The said agreement terminates upon the exercise of the option by Shaanxi Biostar to purchase the shares of Aoxing Pharmaceutical as described below and is governed by the laws of the PRC.
In order to permit Aoxing Pharmaceutical to become an indirectly wholly-owned subsidiary of Biostar when permitted under PRC law, Shaanxi Biostar, Aoxing Pharmaceutical and the Aoxing Pharmaceutical shareholders entered into an exclusive option agreement (the "Exclusive Option Agreement") whereby the Aoxing Pharmaceutical shareholders granted Shaanxi Biostar an irrevocable and exclusive purchase option (the "Option") to acquire Aoxing Pharmaceutical's equity and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. Current PRC law does not specifically provide for the equity of a non-PRC entity to be used as consideration for the purchase of a PRC entity's assets or equity unless the value of the shares are equal to or greater than the value of the enterprise acquired. In addition, there is a lengthy appraisal process which must be approved by the provincial PRC government entities. The consideration for the exercise of the Option is to be determined by the parties and memorialized in future definitive agreements setting forth the kind and value of such consideration.
History of Aoxing Pharmaceutical
Aoxing Pharmaceutical was formed on August 17, 1995 as a limited liability company under the laws of the PRC.
Business of Aoxing Pharmaceutical
Aoxing Pharmaceutical develops, manufactures and markets pharmaceutical and medical nutrient products in the PRC for a variety of diseases and conditions. Aoxing Pharmaceutical’s products are derived from medicinal herbs that it now grows with the remaining purchased from raw material suppliers. Aoxing Pharmaceutical relies on approximately 10 suppliers for its raw materials. For fiscal year 2008, Aoxing Pharmaceutical purchased all its raw materials from third party suppliers because the herbs it was growing were not ripe for harvest and use.
Aoxing Pharmaceutical’s most popular product is the Xin Ao Xing Oleanolic Acid Capsule, an over-the- counter (“OTC”) medicine for chronic hepatitis B, a disease affecting approximately 10% of the Chinese population. In addition to its hepatitis product, Aoxing Pharmaceutical manufactures two other OTC products, two prescription-based pharmaceuticals and ten nutritional supplements. Aoxing Pharmaceutical has adopted international manufacturing standards and currently has three patents pending approval.
Aoxing Pharmaceutical’s products are currently being sold through an established network of more than 200 dedicated sales people. Aoxing Pharmaceutical is also in the process of testing its new internet service, the China Hepatitis Internet Hospital ("CHIH"). We believe that this unique, multi-purpose website serves as an effective marketing tool and distribution channel for Aoxing Pharmaceutical’s hepatitis and nutrient products, while providing patients with convenient, confidential and dedicated service that is provided by a qualified and dedicated staff.
Aoxing Pharmaceutical currently manufactures five drugs and ten nutrients which are sold in over 30 provinces in the PRC. In addition, there are 9 products under development and/or waiting approval, which will complement the existing product line.
Aoxing Pharmaceutical’s significant pharmaceutical products and their usages are summarized below:
Over the Counter medical nutrient products
· Oleanlic Acid Capsule, designed for the treatment of Hepatitis B;
· Ganwang, designed for the relief of the common cold, runny nose, sore throat, headache and fever;
Tianqi Dysmenorrhea Capsule, designed for the relief of pain and other symptoms associated with menstruation.
Prescription pharmaceutical products
Danshen Granule, designed for the treatment of coronary heart disease, myocarditis and angina pectoris;
Taohuasan, designed for the relief of bronchial congestion of the lungs and to reduce associated coughing.
Aoxing Pharmaceutical currently manufactures five over the counter and prescription drugs and ten nutrients which are sold in over 30 provinces in the PRC. In addition, Aoxing Pharmaceutical is in the process of developing 9 additional products to complement its existing product line which range from developmental stage to awaiting approval.
Xin Ao Xing Oleanolic Acid Capsule for Hepatitis B
Xin Ao Xing Oleanolic Acid Capsule for Hepatitis B, also known as Ao Xing Liver Cure, is the only non-prescription drug approved by the SFDA for the treatment of chronic hepatitis B virus ("HBV"), which is prevalent in the PRC. It is estimated that more than 130 million people are infected with HBV, or 10%of the population (some estimates are as high as 15% of the population) in the PRC. According to the World Health Organization, ("WHO") approximately about 1 million people die from hepatic failure, hepatocirrhosis and primary hepatoma caused by HBV infection per year, however it was not until December 2, 2005 that the Chinese government first issued an HBV prevention manual for the general public.
Ao Xing No.1
Main ingredients: Egg yolk lecithin, Vitamin E, Vitamin C, etc.
Usage & reported benefits: Improvement of overall health of the elderly; improved intelligence in children, and improved memory.
Main ingredients: Sterculia Scaphigera, chrysanthemum, Honeysuckle and Mint
Usage & reported benefits: For the treatment of those who suffer from pharyngeal discomfort and chronic pharyngitis.
Main ingredients: Agastache, Perilla, Licorice and Mint
Usage & reported benefits: Improved prevention and recovery periods for those who suffer from rhinitis, sinusitis, headache congestion and running nose in adults.
Main ingredients: Folicartemisiae, chrysanthemum, Honeysuckle, Agastache and Mint.
Usage & reported benefits: Improves the body’s ability to fight influenza and certain sexually transmitted diseases; purification of human body in adults.
AoXing Gan Bao
Main ingredients: polygonum cuspidatum, cordyceps and Ginseng.
Usage & reported benefits: Improved blood circulation by removing blood stasis, strengthening spleen and stomach functions, reduction of body temperature and toxic materials, cholagogic purgative, as well as lowering transaminase in adults.
Main ingredients: safflower, osthol, cork, dragles, dracorhodin, borneol and angelica.
Usage & reported benefits: For the elimination of toxins, intended principally for gynecological inflammation of young and middle-aged women.
Main ingredients: black sesame seeds and medla.
Usage & reported benefits: Adults with premature graying of beard or hair. Treatment of phalacrosis caused by excess fat; postpartum hair loss.
Main ingredients: bulleyacontitin, myrrh and centipede.
Usage & reported benefits: Treatment of cervical spondylosis, rheumatism, hyperplasia, lumbar lesion, osteoporosis, rheumatoid arthritis in adults.
Main ingredients: agkistrodon, cinnamon, safflower and hawthorn.
Usage & reported benefits: Mainly for use by the elderly suffering from cardiovascular and cerebrovascular complications, such as, dizziness headache, amnesia, kidney deficiency, coronary heart disease, and Atherosclerosis, etc.
Main ingredients: walnut meat and camphor.
Usage & reported benefits: Used to treat psoriasis, vitiligo and various dermatitis.